The Climate Bubble: Real Estate and Extreme Weather

Last year, the U.S. experienced 28 confirmed billion-dollar weather events, the most on record since the National Centers for Environmental Information began recording in 1980. Extreme weather events are becoming increasingly common and destructive as the impacts of climate change become more evident, influencing every sector of the economy. Real estate is set to be especially vulnerable as extreme weather events like flooding, hurricanes, and wildfires lead to heightened insurance costs and overvaluation (and a real estate bubble, according to many analysts), as well as changing consumer behavior in the face of heightened risks.

Climate Real Estate Bubble

In recent years, climate analysts have begun to warn of a looming “climate bubble” for real estate. As risks of extreme weather events from flooding to wildfires rise dramatically in coming years, lenders, insurance companies and others will revise valuations of millions of homes, popping a real estate bubble and resulting in crashing prices for homeowners. The crash could be especially detrimental for lower-income homeowners, many of whom hold the vast majority of their net worth in their home value. A 2023 study published in the journal Nature Climate Change found that nationally, property prices are overvalued by between $121 billion and $237 billion when compared to their actual flood risk. A 2022 study by actuarial firm Milliman put a much higher price tag on the bubble – $520 billion, with almost 3.5 million homeowners facing a drop in home value greater than 10% if flood risks were priced correctly.

This bubble could already be in the process of popping in insurance deserts like Florida, Louisiana and California, where the prevalence of flooding, hurricanes and wildfires has made homeowner’s insurance prohibitively expensive or simply impossible to procure. The insurance crisis is already pushing out lower-income buyers, and as existing homeowners begin to find the cost of insurance – or of owning an uninsured home – to be unsustainable, they will begin to sell, potentially triggering panic selling and a housing market collapse akin to that of 2008 in those regions. Real estate analysts caution that comparisons to the 2008 collapse only go so far: The Great Recession housing crisis of 2008 was relatively short-lived as fixes to the financial system helped the real estate market bounce back. Conversely, impacts from climate change are only expected to increase over time.

Changes in Consumer Behavior

Despite enormous risks, climate change-related weather risks have not seemed to impact consumer behavior in the real estate market just yet. Americans are still moving into floodplains, drought-stricken cities, and the paths of hurricanes – and at a historic rate. An analysis by real estate company Redfin found that 629,000 more people moved into counties in the U.S. most threatened by extreme heat than in 2021 and 2022. Counties facing the greatest wildfire risk gained 426,000 net residents in the same period, while the most flood-prone counties gained 384,000. These climate-threatened counties saw a red-hot real estate market as well: In Florida’s Lee County, where Hurricane Ian destroyed 10,000 homes in 2022, home prices rose 70% in 2021 and 2022, compared to a 40% nationwide average during the same period.

The disconnect is largely driven by short-term affordability concerns, according to Redfin analysis in the same study. Many climate-impacted areas – like Arizona and Nevada – remain relatively affordable to prospective homebuyers exiting overheated markets. Another reason that buyers continue flocking to high-risk areas is that many remain attractive places to live, like coastal Florida homes or mountain cabins in California, as well as sound investments based on home price increases in recent years. Finally, homebuyers may simply be lacking information, as climate disclosure requirements vary wildly from area to area – in 23 states, home sellers are not required to report a home’s flood history to potential buyers, and only two states (California and Oregon) require any disclosure of fire risk. A study of California homes by the nonprofit Resources for the Future found that homes with a disclosed fire risk sold for an average of 4.3% less than similar nearby properties with undisclosed risk, and past research has shown that flood disclosure rules create a similar price penalty of about 4%. A study that added flood information about flood risk to Redfin listings found that prospective buyers spent less time looking at or saving listings with high flood risk over time, especially if they were presented with data early in their search. In other words, buyers react as expected to receiving information that their prospective home is at risk from extreme weather events; at the same time, concerns like affordability and desirability of location for other reasons continue to reign supreme.

Builder Adaptations

On the other side of the supply and demand equation, builder behavior is changing to adapt to climate change and maintain growth as the physical environment changes. Real estate drives approximately 39% of total global emissions. A 2019 study by the International Energy Agency found that real estate drives as much as 39% of global emissions, with 11% of these emissions generated by manufacturing materials used in buildings (including steel and cement). The rest is emitted from buildings themselves and by generating the energy that powers buildings. Builders are increasingly considering emissions and climate-proofing in the building process, both to limit contributions to climate change and to make homes and buildings more attractive and affordable to prospective buyers. Recent 10-K filings from major developers in concentrated real estate markets noted that climate risks could spike the cost of property insurance, energy maintenance and damage repair, potentially influencing a decline in demand for office or retail space for buyers unwilling to shoulder the costs of insurance or pay for real estate assets they cannot utilize in times of extreme weather.

One of the most impactful ways builders are responding to climate risks is by adding climate-proofing measures to new buildings and homes to limit insurance costs. In one example, developers of a waterfront luxury apartment building in Boston implemented several weather-conscious changes to their building plan: The building was built nine inches higher than the building previously located on the site, they included an emergency generator on the roof, an 18-inch floodgate layered with sandbags, planted coastal vegetation that can survive saltwater immersion, and constructed the building so that it could withstand 100 miles per hour of wind. Those renovations reduced the building’s estimated flood loss risk from $10 million to $1 million, meaning 10-times cheaper annual flood insurance and savings on wind insurance. A 2018 study by commercial property insurer FM Global found that for every dollar spent on hurricane protection, a building will lower its loss exposure by $105. As climate change continues to progress, builders and developers must adapt their planning and building processes to produce more resilient structures, and consumers must alter their purchasing and leasing behavior – whether by eschewing high-risk, but desirable, areas or by committing to extra costs for weather-proofed buildings.